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How low can CHF go?

   Elizaveta Belugina

EUR/CHF and USD/CHF are slowly crawling up after an impressive fall on Jan. 15 when the Swiss National Bank abruptly removed franc’s peg to the euro, and the Swiss currency soared by 30%. Many traders and investors have lost their money on the move, and the SNB’s reputation has taken a blow.

What will the SNB do next? What surprises are in store of the central bank, and how to trade CHF?

USD/CHF has retraced almost 78.6% of the fall approaching the 0.9600 mark. EUR/CHF retracted less – a bit more than 60% and reached 1.0800.

Expensive CHF hurts the export-oriented Swiss economy. That’s why the country’s central bank didn’t let the national currency appreciate since 2011 to 2015 in the first place. During this time the SNB bought close to a year’s Swiss GDP of euro (short-term euro debt really) to issue similar amounts of CHF denominated debt. This January the SNB realized, however, that capping CHF requires too much, especially as the European Central Bank ECB is about to start the quantitative easing program (QE) which will be debasing EUR against CHF. So, the SNB let go. Now CHF is slowly depreciating versus USD and EUR, but is this process sustainable?

Data suggests that Swiss monetary authorities have continued to intervene in the markets to try to keep CHF at manageable levels. Now as there’s no commitment to keep, the SNB certainly feels more flexible and at ease.

The big plus for CHF bears is that now when investors have to pay for holding money in CHF (because of the negative interest rates), the currency is losing its safe haven status. EUR/CHF was supported and rising even when there was a lot of uncertainty about Greece. This means that the negative yields represent a really powerful instrument.

Yet, CHF is still much higher than before the peg was removed and this hurts Swiss economy. There central bank faces political pressure: the SP party is pushing for the reintroduction of a cap. As the sentiment about Greece has improved, some pressure has lifted of EUR/CHF. Still, the ECB is to start QE in March, so buying pressure on Swiss currency may intensify and the SNB won’t be able to relax.

As a result, strong upside potential in EUR/CHF is doubtful. The pair may have enough strength to hold above the recent lows, but the biggest problem is that the number of further tools available to the Swiss central bank is limited. In order to decrease demand for CHF the SNB has warned of potential further declines in the interest rate for deposits even lower than the current -0.75%. However, it sounds more like an idle threat as such move would hurt Swiss pension funds and banks. So, the only real hope for EUR/CHF to rise much higher is that the euro zone’s economy starts to improve making EUR long once again attractive.

USD/CHF may be another story. It is in reverse correlation with EUR/USD, and the lower the euro goes, the better for USD/CHF. The odds of the Federal Reserve’s interest rate hike this year are high, so USD/CHF will actually have strength to continue its slow move upwards. It’s expected to be slower than appreciation of USD vs. other major currencies, but still modern gains are to be expected. Next target is at 0.9800.

Don't miss the SNB meeting on March 19.

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